Climate Losses Mount
In 2022, at least five weather and climate events topped economic losses of more than US$10 billion. From Hurricane Ian’s impact on the US and Cuba, to European and US droughts, to floods in Pakistan and China, it was the third year in a row that global insured losses surpassed US$100 billion.
Successfully managing this risk begins with understanding how losses related to climate change translate at an individual business level.
Assessing Climate Change Impact
Every TMC business needs to know how risks related to climate change can impact its operations — whether the peril is flooding, windstorm or wildfire, for example — and how those risks are changing in different geographies. It’s also critical for climate risk modeling to extend beyond an organization’s own operations to its supply chain.
This assessment piece of the operational resilience framework can map out the risks. It then falls to the quantification phase to put some figures to the financial implications of climate change.
Quantifying the Climate Change Cost
Most businesses know they are exposed to climate change. In many cases, there is a growing regulatory reporting requirement, such as the Task Force on Climate-related Financial Disclosures (TCFD) or the EU’s Corporate Sustainability Reporting Directive (CSRD).
But the challenge is in understanding the quantum of that exposure. How often is a particular weather event going to happen, and how much will it cost the business?
This is where advanced analytics play a key role. Aon’s Climate Risk Consulting helps businesses understand their exposure across the next 10 to 20 years, whether it’s related to hurricanes in Florida or flood risks in Europe.
It’s important to note that climate change is not just physical risk either. There is also transition risk in areas like regulatory policy and reputation. Understanding and measuring how these risks could impact a business is equally critical.
Following the assessment and identification phases, effectively managing the risk demands innovation beyond traditional insurance methods of risk transfer, which can take a long period to pay out and might not cover an organization’s entire losses.
What if a Category 5 hurricane destroys a TMC business’s manufacturing buildings — for which it is fully insured — but access roads and distribution channels are affected? Or key suppliers are unable to operate? These are the non-damage business interruption costs that are often overlooked and left exposed.
Parametric benefits include:
- Certainty – payment can be made once the trigger conditions are met, regardless of whether actual loss is incurred. No loss adjusting is needed.
- Fast payment – removes financial uncertainty and helps protect the balance sheet.
- Availability of cover – protection for risks not available from the traditional insurance market.